Peter Aven, a founding owner of one of Russia’s biggest private business groups, has warned the investment climate in Russia is worsening as state-linked groups stifle competition and heavy state spending creates a «very dangerous» situation for the budget.
In an interview with the Financial Times, Mr Aven said the Russian budget increasingly resembled the years before the collapse of the Soviet Union. Spending on social programmes had boosted state spending to 38 per cent of gross domestic product. The break-even oil price, at which the state can balance its budget with oil revenues, had climbed to more than $100 per barrel, compared with $20 to $30 per barrel before 2007.
«Economically, we are returning to Soviet times again. When Gorbachev came to power, the country also had huge [hard currency] reserves and there was a low level of debt and a high oil price,» said Mr Aven, who is also president of Alfa-Bank, one of Russia’s largest private banks. «But within three to four years there was no money and a huge foreign debt.»
Capital outflows from Russia, considerably higher than in the summer, continued to mount. Central bank data show net private capital outflows reached $3.9bn in the week ended November 19, according to Goldman Sachs, compared with only $3bn a month in July and August. However, they eased to $2.2bn last week.
He said investors were shifting cash out because other emerging markets offered better returns.
«There are so many emerging economies where people believe there is huge potential for growth, and the problem is Russia is not regarded as one of them by investors,» he said. «That’s mainly because of the lack of competitive environment, corruption and the legal system which is not completely adequate. The level of investment is very low,» he said. The outlook was clouding further because state spending was stoking inflation which would reach 8 per cent this year, and could rise further next year, a pre-election year. The increasing vulnerability of the budget to the oil price was making tax rises for business in Russia almost a certainty, further worsening the outlook for economic growth.
Mr Aven said the biggest factor hindering growth was lack of competition as state groups, in particular state banks, squeezed out private businesses.
«There is still a very strong belief the state can determine the best areas of investment and growth and the state banks can be more efficient than the private ones,» he said. However, government plans to start privatising state assets next year were a step in the right direction.
He said the country had to focus on boosting competition and thereby stimulate private investment. «Unfortunately, you have to sacrifice today’s interests, maybe even pension [hikes]. If you are not able to create a private pension system you have to sacrifice today’s consumption rate. Investment growth has to be a priority or Russia will lose its place in the world.»
Analysts have pointed to the oil-to-telecoms empire that Mr Aven co-founded with Mikhail Fridman as one of the groups most actively moving to other markets. The TNK-oil group it owns 50:50 with BP has moved into markets in Venezuela and Vietnam, and its Vimpelcom mobile phone operator recently announced a $7bn merger with Orascom, the global telecoms group.
Meanwhile, Gleb Fetisov, a minority shareholder in Alfa Group, recently said he was setting up a vehicle to invest $200m in Chinese retail. Mr Aven, however, said the rest of Alfa Group was not following in Mr Fetisov’s footsteps and was much more cautious in its international expansion. «Alfa definitely wants to diversify and become international in all areas of our interests,» he said. «But we try to do this very cautiously in countries which we understand in the areas which we understand.»
«What I am saying about the investment climate is not about Alfa,» he said. «We are a big group so we can survive here ... This is more about smaller business, though we do feel the impact [of the climate] too.»